Canada GDP (for August) Disappoints

Canada reported that August GDP contracted by 0.1%, whereas the consensus expected a 0.1% increase. Small change for sure, but the sign is wrong. And it likely prevents the Canadian dollar from recovering from the recent slide that has brought it to a 4 week low against the otherwise sagging US dollar. Although the US reported a 3.5% expansion in Q3 GDP yesterday on a preliminary basis, it is not clear that the Canadian economy has exited from its recession. The economy was flat in July before the 0.1% contraction in Aug. The weakness in the report was noteworthy in the oil and gas extraction sectors that contracted 2.3%. Manufacturing remains in the doldrums, contracting 0.7%. Some may attribute the weakness in manufacturing to the strength of the Canadian dollar, but the soft demand may be a bigger culprit. What strength there was in the Canadian economy stemmed from the fiscal assistance.

Many investors recognize that Canada is in better fiscal shape than the US, but the risk is this is being exaggerated somewhat. Yesterday S&P cut the province of Ontario's credit rating a notch due to the fiscal deterioration. Canada's national budget deficit is about 6% of GDP and the government debt is about 64%.

The Canadian dollar's downsize momentum see at the end of last week and earlier this week has eased. The US dollar has found a near-term base near CAD1.0630-50. As this was just tested, the rule of alternation now suggests the upper end of the new range may be tested--this is seen near CAD1.0820-50. The data underscores the idea that Canada is lagging behind others in the recovery and in the ability to normalize policy. Key reports next week include employment and IVEY PMI for Oct and are expected to softened from the Sept readings.

Comments

[Bull Run:]

First and foremost in considering the CDN/US dollar is that politically the CDN dollar has always been pushed below par, so betting on a "par value" is risky. CDN historically has never had trade imbalances or current account deficits, and even govenment spending has long been kept in line with expenditures. The exception is of course recently. (Fed and ONT) The US on the other hand has never in memory had any form of a balanced book, (trade balance, current account balance or Federal and state spending ).

Oct 30 10:30 AM

[Donald Ingram:]

To call the recession over in the US is in my view premature. The global credit market is still broken. The US federal budget deficit is still growing. There remains a lack of transparency in mortgage backed securities, while mountains of consumer and corporate debt remain. Recent calls for more bail outs (GMAC) will increasingly expand, ballooning the at present high Federal deficit even higher. The consumer economy is in tatters as deleveraging continues at a feverish pace. The administration continues to monetize the national debt, with high unemployment that is chronic. House prices continue to fall as the second wave of mortgage resets will add to the large shadow inventory of foreclosed houses, and the impending collapse of commercial real estate gathers momentum.
The financial sector still faces a huge crises that is lurking in over-the-counter derivatives, with attending increases in bank failures. The pensions of many remain under funded as are state, county and city budgets. There remains a loss of confidence in the US dollar as ongoing asset deflation and currency inflation continues.

The majority of Canada's trade (70%) is with the US. If there was indeed an improvement as large as the reported increase in GDP by America, there would have been a corresponding change in the trend in Canada. There was not. This large increase in GDP can be attributed to nothing more than stimulus in the system, once this flow subsides the false readings will return to true level. The economies of the two countries are joined at the hip and as long as the US is still faltering, Canada can look forward to more of the same.

Oct 30 11:05 AM

[bob adamson:]

Because Canadian producers and manufactures sell a large share of their production into foreign markets and a large portion of Canadian foreign sales are tied to commodities, Canada since WW II has usually been late to enter into global recessions (i.e. there is a lag before foreign orders for products dry up) but its recessions deepen and drag on longer than those for her trading partners (i.e. recovery must be underway abroad before foreign orders for Canadian products pick up).

This time the Canadian domestic economy held up especially well through 2007 and until recently because it wasn’t plagued by the real estate, banking and government debt and deficit issues faced elsewhere. There was a decline in foreign demand for Canadian products and Canada fell into recession but it was mild compared to that in the US and Europe. Even though there is some indication that the recession is lifting globally, this is not yet reflected in a significant recovery in demand for commodities and other goods Canada sells abroad (while prices for commodities are recovering from their lows, volumes sold are not increasing to the same degree).

The impact of the rapid recent increase in the exchange rate for the CAD$ in US$ terms, the problems in the automotive manufacturing industry and the slowdown of development in the high cost, capital intensive oil sands sector have all served to accentuate the impact of the recession in Canada during the past few months.

In short, the historic trend for global recessions to deepen and be prolonged in Canada may still apply; especially if the global recovery is anemic and slow. This is not to suggest that things will get dramatically worse in Canada, only that its recovery will plateau unless recovery elsewhere increases significantly.

Oct 30 12:29 PM

[The Recusant:]

One thing that I have no concerns about is Canada's ability to sail through the current and ongoing economic storm. All countries have been hit and Canada, "tied to the hip of the U.S." as another commenter put it concerning their manufacturing base, may have been hit harder than some. But the basis for the economy is their strong, no -- a super-strong commodity base. When the worst comes, for a more severe, second leg down is yet to come, countries that are high in commodities and low in population will lead in GDP. Canada's got the gold, minerals, food, timber, water, etc, etc. without the enormous population to drain away their budget in social services. I'll bet my money on Canada versus the U.S. any day...oh, wait, I DO bet my money on it -- everyday!

Oct 31 06:40 PM

[Old Trader:]

As both Donald Ingram and Bob Adamson have pointed out, to a large extent, the Canadian and US economies are essentially joined at the hip.

I attribute the divergence between the US and Canadian GDP numbers solely to the massive stimulus the US injected via C4C, etc. Backing stuff like that out, as its not sustainable gives a much clearer/truer picture.

Oct 31 06:43 PM

[bob adamson:]

Old Trader –

Arguably stimulus in Canada has been more extensive than you appreciate. Last winter when the inter-bank and commercial and consumer credit markets threatened to freeze solid throughout the advanced economies globally, the Canadian Federal Government purchased a substantial portion of the residential mortgage loan portfolios of the major Canadian banks (a good deal for both sides, but that’s another story) thereby leaving the banks with ample funds to service the normal credit needs of each other and their creditworthy customers. The Federal and Provincial Governments are running substantial deficits to maintain employment and services during the recession. The Federal and Ontario Governments together funded 20% of the North America wide cost of the GM and Chrysler bailout.

Bob adamson


On Oct 31 06:43 PM Old Trader wrote:

> As both Donald Ingram and Bob Adamson have pointed out, to a large
> extent, the Canadian and US economies are essentially joined at the
> hip.
>
> I attribute the divergence between the US and Canadian GDP numbers
> solely to the massive stimulus the US injected via C4C, etc. Backing
> stuff like that out, as its not sustainable gives a much clearer/truer
> picture.

Oct 31 07:33 PM

[Old Trader:]

Bob,

Thanks for updating me. Now that you mention it, I do recall reading about the intervention in the residential mortgage securities market during the credit "freeze".


On Oct 31 07:33 PM bob adamson wrote:

> Old Trader –
>
> Arguably stimulus in Canada has been more extensive than you appreciate.
> Last winter when the inter-bank and commercial and consumer credit
> markets threatened to freeze solid throughout the advanced economies
> globally, the Canadian Federal Government purchased a substantial
> portion of the residential mortgage loan portfolios of the major
> Canadian banks (a good deal for both sides, but that’s another story)
> thereby leaving the banks with ample funds to service the normal
> credit needs of each other and their creditworthy customers. The
> Federal and Provincial Governments are running substantial deficits
> to maintain employment and services during the recession. The Federal
> and Ontario Governments together funded 20% of the North America
> wide cost of the GM and Chrysler bailout.
>
> Bob adamson

Nov 01 12:00 PM